A key to buying or selling a business is the ability of the buyer to obtain the money for the business acquisition. Many business purchases or business acquisitions will be financed by a Small Business Administration, SBA 7(a) loan. Here are the major steps to obtain SBA 7(a) financing for purchasing a business and several great resources if you wish to learn more.
- Pull together your financial statement. Here is a link to an SBA Financial Statement Form to use
- Gather 3 years of your personal and if you own a business, business tax returns.
- If married, talk to your spouse. In most cases they will have to co-sign the loan. If they are not willing to do this bring this up early with the bank. It may prevent you from obtaining a loan.
- You may want to get per-qualified from a bank. The banker will look at your information and help you understand the size business that is realistic for you to finance. In all cases the financials of the business will impact and may change this preliminary analysis.
- Obtain any other information requested by the bank loan officer packaging the Small Business Administration loan. There are likely to be many necessary documents.
Next, armed with some idea of the loan you are qualified to get go out and find a business to buy. This is a process. Figure it is likely to take six to nine months and will be a lot of work. Once you identify a business you want negotiate a letter of intent (LOI) with the Seller. A LOI is a preliminary outline of the business terms that your business purchase will be based on. Armed with the LOI go back to your SBA loan officer and….
- Provide the letter of intent to the SBA loan officer
- Provide three years Tax Returns for the Selling Business
- Prepare a forecast and business plan for the next three years for the business finances.
- Complete a full SBA Loan Application
- Obtain all other required documentation. Click here for an SBA 7(a) Loan Program list
Once you have made a full application with the SBA lender for the SBA small business loan there will be many other things for you to do.
- The lender will obtain an SBA Business Appraisal or SBA Business Valuation. This business appraisal confirms that you are paying within the range of Fair Market Value for the business. It means the price you are paying is within the range of a fair deal. It does not mean you are getting a great deal.
- Do your own due diligence. Hire an accountant to go through the books and records and tie cash to the banks and source documents and a check basis. Check out the condition of assets, talk to key people, talk to suppliers, etc. Make sure you are buying what you think you are buying.
- If you have a letter of intent negotiate the full Binding Purchase Agreement. Make sure you hire an attorney that is familiar with business transactions in the state you are in.
- When the day comes, go to closing……Congratulations on your new business and new SBA (7(a) business acquisition loan.
SBA 7(a) and other SBA programs provide a huge source of debt funding to increase your leverage or buying power. For most individuals buying a small business the 7(a) program is the only source of debt funding. The SBA makes loan guarantees to banks for qualifying buyers and businesses that reduces the bank risk to a level where the banks can lend. For details see – SBA, Buy an Existing Business or Franchise https://www.sba.gov/business-guide/plan-your-business/buy-existing-business-or-franchise and How to Finance an Acquisition Using an SBA Loan https://www.entrepreneur.com/article/358292
In some situations there are other forms of financing. For instance some businesses can be purchased with Asset Financing such as loans secured by Accounts Receivable or Real Estate financing. Other, extremely stable businesses like medical and dental practices may be purchased with conventional financing. For multiple possibilities see US Chamber of Commerce, How to finance a business acquisition: https://www.uschamber.com/co/run/business-financing/financing-buying-an-existing-business and CNBC, Secure financing with these 9 types of small business loans https://www.cnbc.com/select/small-business-loan-types/.
The Art of Business Valuation and Harvest Business, LLC have performed 100’s of business valuations for SBA 7(a) purposes and directly for buyers and sellers who want to know the value of the business they are buying or selling. If you have any questions please send us an email today.